Westminster will intervene to cut benefit spending in Northern Ireland if politicians at Stormont cannot come together and agree a budget, Theresa Villiers has warned.

The Northern Ireland Secretary said the Government could not stand by and watch public services in the province be eroded by a failure of the parties to reach consensus and balance the books.

A fierce row has threatened the collapse of the Northern Ireland Assembly since police said IRA members were involved in the murder of Kevin McGuigan in east Belfast last month

Making a Commons statement ahead of fresh talks on both issues in Belfast later, Mrs Villiers said she believed a deal was "possible" on implementing the Stormont House Agreement and resolving the political stand off.

But she said: "We are a One Nation Government and we want to build a Northern Ireland where politics works, the economy grows and society is stronger and more united.

"We strongly support the power sharing, devolved institutions established under the Belfast Agreement. The future of these institutions is in jeopardy if the two very serious matters I have outlined here today are not resolved."

Mrs Villiers said direct Westminster legislation on welfare policy would be a last resort but told MPs it could not be ruled out.

She said: "Without welfare reform measures to deal with in-year pressures, the budget passed by the executive in June simply does not add up.

"This raises the real prospect the executive will start running out of money with resulting damage to frontline public services, such as hospitals, schools and policing.

"In those circumstances the Government cannot stand by and let the situation drag on indefinitely with Stormont less and less able to deliver key public services. As a last resort, we would be prepared to legislate here at Westminster for welfare reform in Northern Ireland.

"But I must emphasise we will do so reluctantly and only after we had exhausted all the realistic alternatives."

Mrs Villiers said the "by far the better outcome" was for the parties in Northern Ireland to resolve the blockage themselves.

Mrs Villiers said she could not comment on the continuing investigation into the murder of Mr McGuigan but outlined the latest police statements suggesting IRA involvement.

She told MPs: "There never was a justification for politically motivated violence in Northern Ireland, from whichever side of the community it came.

"During the Troubles paramilitary organisations inflicted huge suffering on thousands of ordinary people. These organisations should never have existed in the first place, they should not exist today, and they should disband.

"For our part, the Government believes fundamentally in the rule of law. We will not compromise it."

The Northern Ireland Secretary added: "Only parties committed to democratic and peaceful means can or should be eligible to participate in Northern Ireland's political institutions.

"I believe all the parties in the Northern Ireland Executive are committed to those principles but I am fully aware the fallout from the murder of Kevin McGuigan and the continued existence of PIRA structures is a cause of great concern, as is the continued existence of other paramilitary groups."

Mrs Villiers said work was continuing to reach the "day when paramilitary groupings are consigned once and for all to Northern Ireland's history".

Replying to the statement for Labour, shadow Northern Ireland minister Stephen Pound said: "We strongly support the UK and Irish governments' decision to convene all-party talks this week in an attempt to secure a positive way forward on the challenging issues raised by the murder of Kevin McGuigan senior and its aftermath, together with the implementation of the Stormont House Agreement.

"There is no doubt that a combination of real concerns following the chief constable of the PSNI's assessment in relation to the status of the provisional IRA and the failure to agree a sustainable budget pose the biggest threat to political stability in Northern Ireland for many years.

"We urge all parties to seek the necessary compromises and confidence-building measures which can avert the collapse of the institutions."

The SNP's Deidre Brock (Edinburgh North and Leith) said the withdrawal of parties from the Northern Ireland executive was a "worrying development", adding it would be welcome to see them get involved again.

She told MPs: "It would be a blunder of extreme size if the austerity cuts that Northern Ireland is facing became the catalyst for the breakdown of the democratic institutions that have helped to hold a peace, not withstanding the recent violence, and I would urge the UK Government to redouble its efforts to find a resolution to this problem."

Ms Villiers said the executive needed sustainable finances, adding the welfare reform provisions from the Stormont House Agreement need to be implemented.

She added: "Remember, this would give Northern Ireland the most generous welfare system in the United Kingdom."

Conservative former Northern Ireland secretary Owen Paterson said there is "complete exasperation" that local politicians have not delivered the agreement, which is resulting in missed opportunities for the country.

Nigel Dodds, leader of the Democratic Unionist Party in Westminster, asked Ms Villiers if she agreed it could not be "business as usual" for Northern Ireland's political institutions.

The Belfast North MP also said: "The Democratic Unionist Party, speaking on behalf of many, many thousands of people who actually elect us in Northern Ireland, are very, very clear that this matter cannot be swept under the carpet, fudged or ignored.

"We're not prepared to continue as if nothing has happened. Murder has happened - carried out by those who are linked to a party of government.

"Just imagine if that was to happen here - that a party in government, linked to a paramilitary organisation still in existence, whose members carry out murder on the streets of the United Kingdom.

"It's an intolerable situation. It must be sorted out at the talks or serious consequences will flow from failure, striking at the very existence of devolution."

He also asked Ms Villiers to deal with the "criminality" of the provisional IRA and other paramilitary groups, adding: "Will you accept that one of the options, and you have hinted at this already, is that it may be forced to consider is to suspend the Assembly and the political institutions in order in the long-run to restore and maintain any hope of long-term viability of devolution and the Assembly?"

Mr Dodds also warned against a renegotiation of the Stormont House Agreement, as he accused Sinn Fein and the Social Democratic and Labour Party of blocking decisions on welfare reform.

Ms Villiers said she recognised it could "not be business as usual", noting this is why fresh talks have been established.

She added any criminality should be condemned, whoever is responsible for it, adding the PSNI has the UK Government's "full support" in pursuing offenders.

On the suspension of the Assembly and political institutions, Ms Villiers reiterated she did not believe it was the right thing to do at the moment although noted all options would be kept open if circumstances changed " dramatically ".

Alasdair McDonnell, Social Democratic and Labour Party (SDLP) MP for Belfast South, said his party has "always taken responsibility, unlike others" and still supports the Stormont House Agreement.

He added: "But we reserve the right to amend the gaps and repair the flaws in it."

Mark Durkan, SDLP MP for Foyle, warned the UK Government to rethink its tactics of "budget bullying" in relation to welfare reform - a description rejected by Ms Villiers.

Ulster Unionist MP Danny Kinahan (South Antrim) said his party wants a "proper working government" in Northern Ireland and not the current "dysfunctional" government.

He said: "The public are fed up with that and they're fed up with the lack of action and crime. They want to see things happen and happen quickly."

Mr Kinahan added he hoped Northern Ireland's political institutions are not suspended although asked for assurances that a plan is in place to restore them quickly.

Ms Villiers replied: "One of the reasons why we don't think it'd be right to move to suspend is because of the difficulties of getting things up and running at the end of a period of direct rule.

"As I've said, it's not part of our current plans and we very much hope we see a successful outcome of these talks so this question goes away."

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